The corporate formula for innovation often focuses on creating a team of experts to cook up the next big thing. Groups of managers -- typically composed of individuals from a variety of fields, including engineering, marketing and operations -- band together to develop new products or services that can create top-line growth. In a recent paper, Wharton management professor Jennifer Mueller and Wharton lecturer Julia Minson looked at the dark side of teamwork -- the tendency of those groups to become insular and less efficient as they grow in complexity.

In "The Cost of Collaboration: Why Joint Decision-making Exacerbates Rejection of Outside Information," Minson and Mueller found that people working in pairs were more likely to dismiss outside input than individuals working alone. Mueller says this reluctance to incorporate information from outside the team can be a major problem. "Any time a team creates something novel, this decision to integrate information from the outside is key to their success," she says. "You don't succeed unless there is a manager on the outside who thinks what you are doing should be funded. If you are resistant to their input, that is a huge disadvantage."

As outlined in the paper, there are reasons to expect that the act of teaming up would make people either more or less receptive to factoring outside information into their decisions. "Individuals [might] underweight peer input because they are overly attached to their own views," Mueller and Minson wrote. "By contrast, because collaboration requires that individuals cede prior opinions to reach consensus, collaborators may be less satisfied with, and more open to, revising joint judgments." But Minson and Mueller also suggest that the opposite is more likely: Collaboration enhances an individual's confidence, thereby limiting their receptiveness to outside advice.

To test whether collaboration increased or decreased the tendency to factor in outside information or judgments, Minson and Mueller recruited 252 people to work either individually or in pairs to come up with estimated answers to a variety of questions. Among the questions: "What percentage of Americans own pets?" and "What percentage of members of Congress are Catholic?" Once the individuals and teams came up with their responses, they were shown judgments produced by other participants and given the opportunity to adjust their answers. Participants were financially incentivized for accuracy in order to ensure that they offered thoughtful judgments.

The researchers found that the people working in pairs were less likely to adjust their responses than those who worked alone. While people working alone changed their answer to be about one-third closer to the outside judgment they were shown, those working in pairs adjusted their estimate by only 20%. (The level of adjustment stayed the same regardless of whether the outside estimate the participants were given came from an individual or a pair.) While the teams gave a more accurate answer initially, once both the individuals and pairs had a chance to revise their responses, participants who worked in pairs lost their accuracy advantage. After revision, a pair of participants who received input from another pair was, on average, no more accurate than a single individual who received input from another individual. The efforts of four people produced results comparable to those based on the efforts of two people.

According to Minson, there are two possible reasons why people operating in a group may be reluctant to factor in outside information. First, they may want to protect the cohesion of the team and avoid "rocking the boat". Or they may simply be more confident that the answer the team came up with was the right one. To sort this out, Minson and Mueller asked participants about the cohesiveness of their teams, as well as the confidence they had in their answers. They did not find a connection between the level of cohesion of the group and the tendency to factor in outside information. But they did find a correlation between the degree of confidence the pair had in their answers and their likelihood of adjusting the responses based on outside information. "The greater confidence they feel in their judgment is what drives their tendency to discount outside information," Minson notes.

Minson says there may be steps that can be taken to improve the accuracy of team judgments. One possibility -- which she and Mueller plan to study in the future -- is having individuals make an independent judgment before getting together with a team to come up with the final answer.

How Social Comparisons Can Harm Trust

A technology-savvy secretary at a mid-size legal firm is told by her boss that she should seek further training to help the department with its IT needs. The secretary shares the news with her co-workers, and they congratulate her. But once she starts her training, things begin to change in subtle ways: Her colleagues withdraw socially from her and start withholding critical information that could help her in her job.

That example (cited from Cheryl Dellesega's book Mean Girls Grown Up) begins a research paper by Wharton operations and information management professor Maurice Schweitzer, which looks at how social comparisons can undermine trust in working relationships. "We are constantly comparing ourselves to those around us," Schweitzer notes. The problem in a work environment, he adds, is that management -- either consciously through raises and promotions, or unconsciously through differential treatment -- can exacerbate this natural tendency. And the end result, according to his research, is that trust among co-workers can suffer.

Most would agree that trust is critical for cooperation among employees. But in the paper, titled "It Hurts Both Ways: How Social Comparisons Harm Affective and Cognitive Trust," Schweitzer and his co-authors -- Jennifer Dunn from Michigan State University and Nicole E. Ruedy from the University of Washington -- argue that trust needs to be broken down into two components instead of being viewed "uni-dimensionally" (i.e., "I either trust you or I don't"). Specifically, the researchers look at "affective" trust, or "a willingness to be vulnerable ... that is based primarily on the emotional bond between the truster and the trustee," and "cognitive" trust, which is "based primarily on beliefs about the trustee's ability and integrity."

Both forms of trust are important in a cooperative environment, but they can be influenced differently by social comparisons. In the example cited above, for example, the manager's singling out of the secretary for her technology skills might not have damaged the cognitive trust her colleagues have in her -- that is, their perceptions of her competence and their belief that they can rely on her to do her job. Rather, the affective component is damaged -- and that result can be more insidious because "it is subtle and corrodes the relationship" between an "outperformer" and his or her colleagues, Schweitzer notes. "Suddenly, [my coworkers] no longer see me as being on the same team. That leads to the hoarding of information, contacts and resources, and can begin to undermine my ability to succeed. And it happens in a [covert] way that I can't figure out."

The researchers set out to examine the extent to which social comparisons can harm both forms of trust. "Specifically, we expect upward social comparisons to harm affective trust, i.e., people will develop lower affective trust in peers who perform better than they do," they write. "We expect downward social comparisons to harm cognitive trust, i.e., people will develop lower cognitive trust in peers who perform worse than they do."

To test their hypotheses, they conducted a series of experiments that looked at how college students responded to upward and downward comparisons between themselves and their peers in domains that were meaningful to them -- for example, job prospects or test scores. As Schweitzer notes, "social comparisons matter more when the person we're compared with is similar and the domain is self-relevant." A worker may not mind if his or her boss receives a promotion, for instance, but if a co-worker receives one, that would be a more sensitive dynamic, he points out.

In one experiment, Schweitzer and his team surveyed 262 college upperclassmen who had taken the Law School Admissions Test (LSAT) and who were planning to attend law school. The researchers asked the students to write the initials of classmates who had shared their LSAT scores with them and to report those peers' scores as well as their own. Then, the students were asked a series of questions relating to their levels of cognitive trust (e.g., "I would assume this person's work is done properly") and affective trust ("I would admit my worst mistakes to this person") regarding their peers who had the highest and lowest scores. The results supported the researchers' hypotheses -- that is, affective trust toward their peers showed a decline when the students' own test scores were lower, while cognitive trust decreased in those cases when the students' scores were higher than their peers' scores.

One finding Schweitzer and his coauthors didn't anticipate, however, was that the order of the comparisons also had a telling impact: "Upward" comparisons (those putting the student at a disadvantage to a peer) only damaged affective trust when the upward comparison was made first. "In this condition, participants may have been more apt to feel that the upward comparison was threatening to their self-image because at the time of this evaluation, the upward comparison was the only comparison that had been made salient," the researchers write. The opposite was true when the downward comparison happened first -- the student subjects were less inclined to mistrust the subsequent higher scorers. "The act of engaging in a favorable comparison [first] may have inoculated participants to the threat of a subsequent upward comparison. Participants did not need to disparage or withdraw from the higher-scoring individual because they knew they had performed better than another peer; as a result, affective trust was maintained."

According to the authors, the takeaway for managers is that the fallout from social comparisons can be buffered by boosting employees' perceptions of their own value prior to calling their attention to outperformance by others -- whether through promotions, raises or other rewards. Goal-related performance recognition could be framed more thoughtfully to diminish the effects of social comparisons, they add. For example, instead of rewarding one employee for "outselling 30 peers," a manager can cite the outperformer's "outstanding sales and customer service." Ultimately, managers might favor team rewards over individual recognition to encourage performance, they suggest.

Cognitive trust is relatively easy to repair, since it depends on a person's demonstration of competence in a given arena. "One success can do it," Schweitzer notes. But affective trust is much more difficult to mend, he adds, and therefore merits the kind of caution he and his co-authors are advocating for when it comes to making comparisons among employees. Rankings and recognition programs can motivate individual employees' performance, but managers need to carefully weigh the subtle costs of implementing programs that increase workers' natural tendency to compare themselves with others. "We fail to appreciate how harmful this can be for our relationships," he says.

Location, Location and ...?

What is it about London and New York? In the 50 or so years since hedge funds have been investing, thousands have gravitated to these thriving financial services hubs. Today, London and New York account for a sizeable chunk of a global industry that is set to reach a record $2.26 trillion of assets under management this year, according to a recent Deutsche Bank prediction. What's more, these two mega-cities have served as a training ground for countless entrepreneurial hedge fund executives who leave their old firms to set up successful new ones.

One reason why these fledgling firms have thrived is what many scholarly studies refer to as "traditional agglomeration effects" -- that is, the economic benefits companies enjoy concurrently from being physically located in an industry hub, says Wharton management professor Evan Rawley. But is there something more influencing the performance of such entrepreneurs?

For an answer, Rawley joined Rui De Figueiredo of the University of California at Berkeley's Haas School of Business, and Wharton doctoral candidate Philipp Meyer to analyze a sample of hedge fund firms and the career paths of their principal managers. While previous research in other sectors, including high tech, has shown that a firm's present location can be important to its performance, these latest findings underscore the pivotal role also played by training, technical knowledge and, to a lesser degree, social networks that entrepreneurial employees take from "incumbent" companies when they move on to set up a new venture.

In other words, the location of an employer can have a big impact on future entrepreneurs' performance. It's what the authors refer to as "inherited agglomeration effects." In their paper, titled "Inherited Agglomeration Effects in Hedge Funds," Rawley and his co-authors note, "When a firm in an industry hub benefits from agglomeration effects, employees of the firm will develop valuable human capital that may be subsequently transmitted to new ventures."

According to Rawley, "The traditional agglomeration effect is contemporaneous [so] if we're based in London or New York today, that's really good for us because we're in the milieu and a part of what's going on there. That makes sense. That's what most people looked at in the past." But with the notion of inherited agglomeration, and using hedge funds -- a very knowledge-intensive business with little formal intellectual property protection -- as an example, "it's not about being in London or New York. You could be in Minneapolis," he notes. "But the fact that you have been in London or New York is significant."

The research focused on 548 hedge fund managers at 414 hedge funds spawned by 95 different firms. The researchers found that the funds launched by executives who had previously been located in New York or London outperformed their peers by about 1.5% per year, net of fees, "an effect that is at least as large as 'traditional' contemporaneous agglomeration effects," Rawley says. He adds that before the study's findings were completed, "I would have thought it would have been about half that. Compounding that over a long period, you're talking around 16% over 10 years, so it's a big effect."

Rawley says investigating why some new companies succeed and others don't -- and why some entrepreneurs inherit more knowledge than others -- in the hedge fund context required "the full tool basket of econometrics" to hone in on an individual's development, past and present. The key was to tease out data indicating the transfer of knowledge from a firm to its former employee through careful analysis of individual managers' biographical information.

Beyond the hedge fund industry, the findings are useful on several levels. For one thing, they help explain how human capital spreads from a parent company in an industry hub to peripheral regions through the entrepreneurs it has nurtured. For another, the results show young hedge fund managers and other professionals who aspire to one day open their own companies why it's important to consider where an employer is based. "If you want to be successful in an industry, it's very important that you go to the center of that industry and learn so that you can absorb all the activity around you, which is really a message for entrepreneurs," Rawley states.

"But I think [the research is] germane for employers, too, because a lot are looking for a way to provide something for their employees," such as a place to learn before starting a business of their own, Rawley notes. Likewise, prospective investors studying the career trajectories of the managers behind new venture may also want to consider inherited as well as traditional agglomeration effects, Rawley adds.